Note: This post was submitted to Student Caffé by Elyssa Kirkham. Elyssa covers student loans, personal loans, debt, and credit for Student Loan Hero. Her work has been featured in TIME, CBS News, MSN Money, Business Insider, Daily Finance and more. We would like to thank her for her submission and credit her as the author of this blog post.
As of 2017, the average amount of medical school debt that med students incurred by graduation was $192,000, according to the Association of American Medical Colleges (AAMC).
This six-figure debt is high enough already, but it can quickly grow. With interest charges totaling $960 a month on average (assuming 6.00% rates), the climbing cost of medical school debt can be a significant burden. Therefore, the choices you make right out of medical school and in residency have a huge effect on your student loan repayment.
By looking ahead at your options, you can run some diagnostics on your student debt and explore different repayment options. Here are some smart strategies that can effectively treat and pay off medical school debt:
1. Make payments in residency.
You're entitled to mandatory residency forbearance for each year of your residency program, which puts repayment of your medical school debt on hold. Add in the hectic lifestyle and relatively low pay of residency to the high costs of medical school debt, and forbearance can sound like just the relief you need.
Yet even in forbearance, interest will still be assessed on your medical school debt. On a $192,000 balance with average interest rates at 6.00%, your balance will grow by $11,520 each year you take advantage of residency forbearance.
The good news is that you have more choices than full forbearance or following a standard 10-year repayment plan (which, under the assumptions above, would cost just over $2,100 a month).
One such option could be to forbear your student loans but pay a bit toward the interest each month. You can choose to pay as little or as much as you want; it's up to you. Just remember, interest you pay off now is interest that won’t accrue it’s own interest later.
2. Choose the right income-driven repayment plan.
Another alternative is enrolling in an income-driven repayment (IDR) plan. These plans set your monthly payments to an affordable amount based on your income, the local cost of living, and your family size. Under an IDR plan, a resident earning an annual stipend of $54,600 can expect to pay between $310 and $380 a month, according to the AAMC.
There are four types of IDR plans, and each has its own structure and set of requirements. You'll want to carefully research different plans and choose the right one for your student debt strategy.
As an example, say your top goal is to limit your interest costs. The Revised Pay As You Earn (REPAYE) Plan would be your best IDR option since the plan covers 50% of unpaid interest.
If you make $310 monthly payments under REPAYE, that leaves $7,800 of unpaid interest each year on a $192,000 balance. Of that amount, you'll be responsible for just $3,900, as the Department of Education pays the other half. Over a three-year residency, choosing REPAYE would save you $11,700 in interest.
3. Aim for student loan forgiveness.
Why not get help paying off your medical school debt? There are several options for doctors to get student loan forgiveness and repayment assistance. Here are a few to consider:
Forgiveness under IDR plans:
On top of lowering payments, some IDR plans also come with the promise of student loan forgiveness after 20 or 25 years of payments.
If you're hoping to take advantage of this perk, you might want to consider the Pay As You Earn (PAYE) Plan; it has the lowest overall costs over 20 years, the AAMC estimates.
Under this plan, a physician who repays student loans over a three-year residency and for 17 years after that will have about $46,000 in debt forgiven (of course, that's after paying $390,000 toward their medical school debt).
Public Service Loan Forgiveness:
You could earn forgiveness in half the time (10 years) with Public Service Loan Forgiveness (PSLF). This program offers forgiveness to government and other public service workers. Many physicians' employers will qualify for PSLF, including those at public hospitals and nonprofit clinics.
Sticking with public service employment to gain forgiveness at the end can have a big payoff. According to the AAMC, a medical school graduate who enrolls in REPAYE and pursues PSLF will pay just $113,000 before the remaining balance is repaid. Compare this to the $255,791 that would be paid over the same period under a standard 10-year repayment plan.
Student loan repayment assistance for doctors:
There are other student loan forgiveness programs for doctors besides PSLF. For example, the National Health Service Corps (NHSC) offers $50,000 to $120,000 in repayment assistance to doctors who commit to providing care at a designated site.
The NHSC also offers the State Loan Repayment Program, which gives additional awards to physicians who commit to working in underserved areas.
With some research, you can uncover further opportunities to get student loan forgiveness and assistance.
4. Target interest charges on medical school debt.
Lastly, look for ways to keep down the interest charges on your medical school debt. Barring student loan forgiveness, you'll have to repay your principal balances no matter what. But how much interest you pay on your medical school debt is up to you.
Here are a few ways you can lower the interest you pay over the life of your loan:
- Always pay at least enough to cover monthly interest costs. Interest alone can still be costly (keep in mind the $960 a month cited earlier), but every dollar of interest you pay now will save you from compounding interest later.
- Make extra payments as soon as possible. The key to paying less interest over the life of your medical school loans is to lower your principal (the amount on which you're charged interest)—and fast. Carving out an extra $100 or $200 a month to pay down your debt could save you thousands in interest later.
- Apply signing bonuses and other big payouts to student debt. In addition to sending in a bit extra each month, earmark all "extra" funds to go toward student debt. Physician signing bonuses can be significant windfalls, for example. A $30,000 bonus could result in you taking home around $20,000 after taxes. If $20,000 was applied to $192,000 in student loans as a lump-sum payment, it would save $15,300 in interest and shave 17 months off a 10-year repayment schedule.
- Consider refinancing student loans. This step won't be right for every physician, but it's really the only way to lower student loan interest rates and the resulting charges. Taking a $192,000 balance from 6.00% to 4.50%, for example, would save $17,000 in interest over 10 years and lower monthly payments by $140. It’s worth shopping around to see if you could qualify for the lower rates that make refinancing student loans a smart move.
Like many health issues, student loans will steadily worsen and become more complicated and painful if ignored. With proactive management and a smart approach, you can select the right tools and strategies to control your medical school debt!